Indo-Mauritius DTAA: Permanent Establishment

The cessation of permanent establishment is relevant only for the purposes of taxability of business profits, and has no impact on the taxability of capital gains of alienation of the PE or its assets

[2010]  2010 TPI 188  (Tribunal - Mumbai)

Cartier Shipping Co. Ltd.-vs.- DDIT (IT)

ITA No. 3036/Mum/07

07 June 2010

Judgment

Per Pramod Kumar:

1. This is an appeal filed by the assessee and is directed against the order dated 17th March 2006 passed by the Commissioner (Appeals) in the matter of assessment under section 143(3) r.w.s. 147 of the Income Tax Act,1961, for the assessment year.

2. The assessee has raised as many as fifteen grounds of appeal, but as learned representatives fairly agree, these grounds of appeal are the only arguments in support of two main issues requiring our adjudication, which are (a) whether or not, on the facts and in the circumstances of the case, the Commissioner (Appeals) was justified in upholding validity of reassessment proceedings; and (b) whether or not, on the facts and in the circumstances of the case the Commissioner (Appeals) was justified in upholding the addition of Rs 111.16 crores on account of short term capital gain, on sale of rig. We will, therefore, address ourselves to these two main issues one by one.

3. We will first take up assessee’s challenge to the validity of reassessment proceedings which has been negated by the authorities below.

4. The assessee before us is a company registered under the laws of Cyprus on 15th January 1990, which was later registered as a foreign company in Mauritius on 9th June 1993. Based on this registration in Mauritius, though as a foreign company, the assessee was issued as tax residency certificate by the Commissioner of Income Tax, Mauritius, on 23rd June 1993. On the strength of this certificate, the assessee claimed protection of India Mauritius Double Taxation Avoidance Agreement1, which was duly granted to him by the Assessing Officer.

5. The assessee company owned a 300 ft cantilever type jack up rig which is used for drilling, prospecting and production of hydrocarbons in the offshore oil fields. The assessee had given this barge on charter basis to Amer Ship Management Limited which, in turn, had leased it out to Oil & Natural Gas Commission. During the relevant previous year, this arrangement came to an end, and vide letter dated 5th October 1997, the assessee advised the Assessing Officer as follows:

We would like to inform you that our contract regarding charter of Jack Up Rig FD III to Amer Ship Management Limited has been terminated on 3rd October 1997 at 1830 hours. As such the assessee company, although would be doing business elsewhere in the international waters, has discontinued its business operations in India, and has moved the aforesaid Rig from Indian territorial waters to international waters.

Kindly consider this letter as an intimation of discontinuance of business in India and given as a matter of abundant caution.

Please note that Amer Ship Management Limited will continue to be our agent for the purpose of Income Tax Act, 1961, and you may continue to send them all communications to them at the above address.

6. In its income tax return for the relevant previous year, the assessee claimed a NIL taxable income, but as the assessee was not able to substantiate its claim for expenses incurred under various heads, the Assessing Officer estimated the income, under Rule 10 of the Income Tax Rules, on 10% of the total turnover. The income was accordingly assessed at Rs 1,52,99,720, vide order under section 143(3) dated 9th February 2001.

7. The matter, however, did not rest there.

8. On 2nd June 2004, in exercise of his powers under section 147 of the Act, the Assessing Officer reopened the assessment. While doing so, the Assessing Officer recorded the reasons of reopening as follows:

The return was filed by the assessee on 30th November 1998, for the assessment year 1998-99, showing NIL total income. Assessment order under section 143(3) of the Income Tax Act, 1961, was passed on 09-02-2001, determining total income at Rs 1,52,99,720.

On going through the records, it has been noticed that the assessee has discontinued its business operations in India from this assessment year. The assessee had a jack up rig which it had brought into India on which it was claiming depreciation. Further, it is seen that during the year, it had received payments from Amership Management Ltd. The nature of payments in the TDS certificates being mentioned as ‘charter hire and other payments’ on which tax was deducted @ 4.8%. It has shown gross receipts of USD 38,89,101.

As per information available with this office, the assessee had sold the rig during the assessment year for USD 35 million and has earned capital gains on the same. The written down value of the rig as on 1.4.1997, as per the income tax return, was USD 6,428,027. Thus capital gains chargeable to tax of USD 28,571,973 (INR 102,94,48,187 using 1USD = 36.03 INR) has escaped assessment.

I have reasons to believe that income to the extent of Rs 102,94,48,187 chargeable to tax has escaped assessment for the assessment year 1998-99 as above.

…………”

9. The assessee objected to the initiation of these reassessment proceedings but none of the authorities below upheld these objections. While the Assessing Officer simply brushed aside these submissions, the CIT(A) discussed these objections at length and then rejected the same on merits. It was noted by the CIT(A) that on 13th May 2004 a tax evasion petition was received by the Director of Income Tax (International Taxation) and this petition contained information about evasion of capital gains tax on sale of rig for US $ 3,50,00,000 . This tax evasion petition was examined by the Assessing Officer who ultimately recommended that the case for assessment year 1998-99 be reopened for examining the taxability of capital gains. When this report, alongwith the comments of the Joint Director of Income Tax, was placed before the Director of Income Tax (International Taxation), it was, inter alia, observed by the DIT that “I have perused the facts stated by the AO and the comments through the Addl DIT‐ 1” and “ I agree that there is enough reason for reopening and reexamining the case for the AY 1998‐99”. Permission for issuance of notice under section 148 was, accordingly, granted. The CIT(A), after narrating the above facts, observed that there was no procedural lapse and the due process of reopening was followed. The CIT(A) further observed that a perusal of case records reveals that the assessee did not make any mention about the sale of the jack up rig, as also the claim that the capital gains earned the claim that these capital gains are not taxable in India. The CIT(A) was of the view that such a non disclosure in the income tax return as also in the course of the assessment proceedings constituted lapse of the assessee and it amounted to concealing the relevant particulars. The CIT(A) also noted that as a result to the tax evasion petition having been received by the Assessing Officer, he had reasons to believe that capital gain on sale of jack up rig, which was an asset of the permanent establishment and on which depreciation was duly claimed by the assessee, has escaped assessment. The CIT(A) thus upheld the initiation of reassessment proceedings. The assessee is not satisfied by the stand so taken by the Assessing Officer as well as the CIT(A) , and is in appeal before us.

10. The main thrust of learned counsel’s submissions before us is that while the assessee did not indeed mention, in its income tax return, about the fact of having sold the jack up rig, it did not amount to any failure on the part of the assessee inasmuch as the assessee did not have any obligation to inform the same to the Indian tax authorities. It is submitted that the assessee is a non resident, that the assessee did inform the tax authorities about the cessation of business in India with effect from 3rd October 1997, and once the assessee winds up his business in India, it is of no concern to the tax authorities as to what does assessee do with his assets. Since the assessee does not have any obligation to inform the Indian tax authorities about disposal of its assets, this omission cannot be construed as a lapse on the part of the assessee which is a sine qua non for initiating the reassessment proceedings after end of four years from the end of the relevant assessment year. Learned counsel submits that there was no failure on the part of the assessee, and as such the reassessment proceedings could not have initiated in the present case. It is emphasized that the sale has taken place outside Indian territorial waters and it has no tax implications in India. We are thus urged to quash the reassessment proceedings. Learned Departmental Representative, on the other hand, submits that merely because the assessee has closed his business in India does not imply that his entire taxability in India comes to an end. The cessation of permanent establishment is relevant only for the purposes of taxability of business profits, and has no impact on the taxability of capital gains of alienation of the PE or its assets. It is pointed out that the assessee was taxable in India in the relevant previous year and had duly filed its income tax return as well. It is also not in dispute that the assessee had sold its jack up rig in the relevant previous year itself, and this jack up rig was used as an asset of the permanent establishment on which depreciation was claimed . Even if assessee was of the bonafides view that the capital gains on sale of this oil rig was not taxable in India, it was assessee’ statutory obligation to disclose the fact of sale of this oil rig under ‘incomes claimed to be exempt from tax’ in the income tax return in a transparent manner. The tax authorities were thus deprived of relevant information about sale of oil rig. It is contended that the gain on alienation of assets of the PE, or even PE itself, constitutes capital gain chargeable to tax in India under the Income Tax Act, 1961, as also under the provisions of Article 13 of the India Mauritius tax treaty. It is submitted that but for the information coming to the knowledge of the Assessing Officer, as a result of the tax evasion petition filed against the assessee, this transaction would have gone wholly unnoticed to the Indian tax authorities. The assessee was clearly at fault, was not operating in a fair and transparent manner, and did not discharge his obligations of giving full and complete disclosures in the income tax return. It was thus submitted that the case of the assessee is clearly covered by proviso to Section 147 which permits reopening of assessment even after the expiry of four years, from the end of the relevant assessment year, in a case in which the assessee fails to disclose fully and truly all material facts necessary for his assessment for that assessment year. In rejoinder, learned counsel for the assessee once again submits that the fact of the sale of rig was not relevant or necessary for assessee’s tax assessment in India, nor was assessee under any obligation to disclose the same in its income tax return. We are thus urged to quash the reassessment proceedings.

11. We are unable to see legally sustainable merits in the arguments raised by the learned counsel. There is no dispute that the assessee was liable to be taxed in India in the relevant assessment year, and there is also no dispute that an asset belonging to the Indian PE of the assessee company, on which depreciation was claimed in India, was also sold in the previous year relevant to this assessment year. The assessee was all along claiming depreciation on this asset, and in the relevant previous year itself the assessee has shown income from chartering this rig. The cessation of permanent establishment is relevant only for the taxability of business profits and, even after the cessation of permanent establishment in India, a non resident assessee can still be liable to its taxability under other heads, including under capital gains, in India. The assessee was taxable in India in respect of its PE, and therefore, the assessee was under an obligation to share all the facts relevant to its Indian PE – whether in respect of business profits or under any other head of income. An income tax return was indeed filed by the assessee but this income tax return had to mention about sale of PE assets on which depreciation was claimed. Whether the sale of PE asset has taken place in India or outside India, even if that can be considered relevant for ascertaining taxability of gains on such sales, can only be ascertained upon examination of relevant facts which the assessee was duty bound to share. It is not really material that the assessee genuinely believed that sale of such an asset of the permanent establishment will have no tax implications in India, because, as per the compliance requirements of filing of the income tax return, details of even an exempt income are required to be disclosed of an income tax return. It was open to the assessee to make the necessary disclosure and still claim that the sale of oil rig has no tax implications in India. However, once the assessee does not mention about the sale of PE assets at all, this is clearly a failure on the part of the assessee in “disclosing fully and truly all the material facts necessary for his assessment for that particular year” inasmuch, as we have emphasized above, even exempt incomes are required to be disclosed in the tax return and inasmuch as this fact about sale of the rig, used in the PE and on which depreciation was claimed, was a material fact for assessment of assessee’s income taxable in India for that particular year. On the facts of the present case, therefore, it cannot be said that the assessee had fully and truly disclosed all the material facts necessary for his assessment. As is specifically provided for in the proviso to Section 147, unless the assessee discloses “fully and truly all material facts necessary for his assessment for that particular year”, the assessee cannot claim protection of proviso to Section 147. In our humble understanding, there has been a lapse on the part of the assessee in full and complete disclosure of all the material facts and, accordingly, the assessee is not entitled to protection of proviso to Section 147 from reopening of assessment after the expiry of four years from end of the relevant previous year. As to the contentions raised about non taxability of such an income on sale of oil rig, all those fine points of law and facts are not to be settled, on merits, at the stage of initiating reassessment proceedings. What is to be seen at this stage is existence of reasons which have live link to an income escaping assessment , but not the established fact of escapement of income. In other words, at the point of time of initiating the reassessment proceedings, is existence, and not adequacy of reasons. As observed by the Hon’ble Supreme Court, in the case of ACIT Vs Rajesh Jhaveri Stock Brokers Pvt Ltd2 ,“ At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed requisite belief” and “whether the material would conclusively prove the escapement of notice is not relevant at this stage”. In view of the these discussions, we are of the considered view that (i) there was a failure on the part of the assessee to make true and proper disclosure about sale of rig, which was part of the PE assets and on which depreciation was claimed in India, in its income tax return, and thus there was a failure of not “disclosing fully and truly all the material facts necessary for his assessment for that particular year”, that (ii) the Assessing Officer had sufficient reason to believe that income on such sale of this jack up rig, which was used as PE asset in India and on which depreciation was claimed in India, has escaped assessment in India, and that (iii) the Commissioner (Appeals) was thus justified in upholding the validity of the impugned reassessment proceedings under section 147. The assessee’s grievances against initiation of reassessment proceedings are, accordingly, rejected.

12. That takes us to the core issue regarding taxability of gains, on alienation of jack up rig, in India. As we have noted above, the assessee is a non resident company which owned a 300 ft cantilever type jack up rig which is used for drilling, prospecting and production of hydrocarbons in the offshore oil fields. The chronology of events, as culled out from the material before us, is like this. The assessee company had entered into agreement with Amer Ship Management Limited on 15th April 1993. It was after this agreement that the assessee was registered as a foreign company in Mauritius on 9th June 1993, was granted a tax residency certificate by the Mauritius revenue authorities on 23rd June 1993, and, accordingly, it filed first tax income tax return in India on 30th November 1994 in respect of profits attributable to the Indian PE of alleged Mauritius tax resident. The assessee company given the said jack up rig on charter basis to Amer Ship Management Limited (ASML, in short) and the ASML, in turn, has use it for servicing their contract with Oil and Natural Gas Commission. The income so earned by the assessee in India was all along offered to tax in India by the assessee on net basis and after claiming deduction for depreciation, as admissible under the Income Tax Act, 1961. On 24th April 1997, the assessee entered into an agreement with Foramer SA France, to sell the said jack up rig to the Foramer SA or its nominee. Pursuant to this agreement, the jack up rig was finally sold to Foramer’s nominee Pride Global Limited – a company based in Tortola, British Virgin Islands. On 19th September 1997, the assessee issued a bill of sale (bearing no. 109117; dated 19th September , 1997) in favour of Prider Global Limited. This bill was duly notarized by one Nigel Peter Ready, a London based notary public, who inter alia certified that the said “bill of sale was signed and delivered as a deed in my presence by Claire Hamilton Horsley, the duly authorized attorney of Cartier Shipping Limited of Nicosia, Cyprus, under and by virtue of a power of attorney dated 12th September 1997…” . On 15th September, 1997, London Offshore Consultants WLL – the surveyors, boarded the rig and coordinated its move from Bombay High to the location designated for handover of this rig to the buyer. On 30th September, 1997, the assessee obtained a port clearance certificate from the authorities, and, finally, after de‐engaging the rig from ONGC contract on 3rd October 1997, the rig started moving towards the handover location in international waters (at latitude 17°33.0’ N longitude 69°25.0E’) where it was handed over to the buyer on 6th October 1997. On these facts, the Assessing Officer held that the gains on sale of this rig were taxable in India as the asset sold was used for PE on which depreciation was claimed in India all along. The Assessing Officer took not of assessee’s contention that since the assessee was a non resident, since operations of the PE have already come to an end, and since the sale was effected outside the Indian territory i.e., at sea in International waters at a distance from the Indian west coast exceeding 200 nautical miles, profit on such sale could not be brought to tax in India. The Assessing Officer was of the view that “a PE is usually controlled by the foreign principal as a non‐resident under the I.T. Act 1961” and that “ a foreign parent company would be taxed in India only in respect of those profits which are attributed to the activities of subsidiary in the capacity of the PE”. It was also noted that “ Even by assessee’s own submission in its Return of income, it has stated its status as ‘Non‐resident with Permanent Establishment’ thereby not denying it has no PE in India” and that, “therefore, there is no dispute that the assessee is having PE in India”. The Assessing Officer also noted that the assessee had maintained the books of accounts as required by the Income Tax Act, in relation to the Indian PE and that “the assessee has kept books like General Ledger, Party Ledger, Bank Book, Sales Register, Expense Register and further assessee claimed depreciation u/s 32(2) of the Income Tax Act”. The Assessing Officer was of the view that “By claiming depreciation while computing the business income of PE, the assessee itself has accepted the fact that the Jack Up Rig on which depreciation has been claimed is owned and belongs to Indian PE of the company”. It was thus held that the assessee was liable to be taxed on sale of the asset which was part of the Indian Permanent Establishment of the assessee company. The Assessing Officer also referred to Article 13(2) of the India Mauritius Double Taxation Avoidance Agreement3 in support of the proposition that even under the applicable tax treaty, gains from alienation of moveable property forming part of the business property of a permanent establishment , including such gains from the alienation of such gains from the alienation of such a permanent establishment itself (alone or together with the whole enterprises)” are taxable in the PE jurisdiction. It was thus held that under the domestic law as also under the applicable tax treaty, the assessee is liable to be taxed in respect of gains on sale of PE assets. The contentions of the assessee were thus rejected, and the capital gain of US $ 2,85,71,973, converted into Rs.102,94,48,187, being on sale of depreciable assets were taxed as short term capital gains of the assessee taxable in India.

13. Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A), inter alia, questioning correctness of the aforesaid quantum addition of Rs 102,94,48,187. The CIT(A) but without any success. The CIT(A) confirmed the action of the Assessing Officer in principle and enhanced the quantum of addition to Rs 111,16,24,990, by observing as follows:

4.4 I have considered the arguments of the A.R. and I have also examined the facts. The appellant company has been operating in India since A.Y. 1994-95 when it had given the rig on hire. Returns were filed taking the benefit of Indo-Mauritius DTAA in A.Ys 1994-95, 1995-96, 1996-97, 1997-98 and 1998-99. The A.O. had made the assessment of A.Y. 1994-95 to 1998-99 after applying the provisions of section 44BB. However, the appellant had filed appeal and succeeded in A.Y. 1994-95, 1995-96, 1996-97 & 1997-98 before the ITAT, Mumbai, that the income of the appellant should not be assessed by applying section 44BB, but in accordance with the Article 7 of the DTAA after allowing deduction for all expenses including depreciations. In accordance with the direction of ITAT, depreciation was allowed and the order giving effect to the order of CIT(A) for A.Y. 1997-98 was passed on 22.3.2004 by ADIT(IT)-1(2) in which the cost of rig as on 1.4.1993 was taken at Rs.51,21,12,236/-. Depreciation was allowed @ 25% on WDV basis for A.Y. 1994-95 to 1997-98 ad the WDV as on 1.4.1997 was computed at Rs.16,20,35,512/-. Assessment of A.Y. 1998-99 was completed u/s 143(3) after once again applying section 44BB. Appellant filed appeal before the learned CIT(A) which was dismissed being late. Accordingly the assessment order passed by the A.O. had become final.

(1) the following incomes shall be deemed to accrue or arise in India:-(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.

(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;

(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;

(c) in the case of a non-resident, being a person engaged in the business of running a news agency, or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;

(d) in the case of a non-resident, being –

(1) an individual who is not a citizen of India; or

(2) a firm which does not have any partner who is a citizen of India or who is resident in India; or

(3) a company which does not have any shareholder who is a citizen of India or who is resident of India.

no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph firm in India.”

1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the Contracting State in which such property is situated

Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a contracting State has in the other contracting state or of movable property pertaining to a fixed base available to a resident of a contract State in the other contracting state for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State.

(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers
(ii) the written down value of the block of assets at the beginning of the previous year; and

(iii) the actual cost of any asset falling within the block of assets acquired during the previous year;

such excess shall be deemed to be the capital gain arising from the transfer of short term capital assets;

14. The assessee is aggrieved by the addition so confirmed and so enhanced by the CIT(A), and is in appeal before us.

15. The main thrust of learned counsel’s arguments is that the sale of rig has taken place on 6th October 1997 since that is the date on which possession of rig was handed over to the buyer in international waters and that is the date on which payment was received from the buyer. It has been repeatedly emphasized that the references in the assessment order are for dates of agreement to sell and not the actual sale itself. Learned counsel has painstakingly taken us through various clauses of the agreement to demonstrate that the sale is completed on 6th October, 1997. It is also pointed out that, beyond any doubts or dispute, the rig has moved out of Indian territorial waters on 4th October 1997. Learned counsel has emphasized that once the rig is moved out of India, upon termination of its contracts in India, it is of no concern to the Indian tax authorities as to what assessee does to the rig, and that the rig was not acquired from any funds earned in India. It is also emphasized that the risk in the rig has passed on 6th October 1997, upon handing over of its possession and delivery to the buyer, and thus it could not be said that the sale of rig has taken place on a date earlier than 6th October 1997. Our attention is also pointed out to the fact that once rig itself moves out of Indian territorial waters or is not operational, the assessee cannot be said to have a permanent establishment in India, and once the PE itself comes to an end, it ceases to be of concern to the Indian tax authorities as to what the assessee does to its assets. The only live link and nexus of assessee’s taxability in India is its ‘permanent establishment’ and once the ‘permanent establishment’ ceases to exist in India, the assessee’s taxability in India also ceases. Learned counsel contends that if under the terms of agreement, an asset of the non resident is to be handed over to an offshore buyer outside Indian territory, the gains on such sale can never be taxed in India. As for the claim of depreciation, it is submitted by the assessee that the depreciation was claimed so as to work out the profits attributable to the permanent establishment – which is necessary for ascertaining the quantum of income taxable in India. Merely because the depreciation is claimed, it cannot imply that whenever this asset is sold anywhere in the world, profits or gains on such sale of asset will be brought to tax in India. The claim of depreciation in India cannot per se decide the situs of taxability on sale of the related assets. Just because an assessee had a permanent establishment in India, the Indian tax authorities cannot be inferred to have a permanent lien on taxability on sale of assets used by such a PE. Our attention was again invited to the document titled ‘ change of ownership’ signed by the assessee and the buyer, at page 2 of the paper book, which supports assessee’s contention that transfer change of ownership took place on 6th October 1997. Our attention was also invited to the certificate dated 6th October 1997 confirming the same position, issued by the surveyor i.e. London Offshore Consultants, and delivery protocol signed by the assessee and the buyer, supporting the same contention – copies of which were placed at pages 3 and 4 of the paper‐book. A reference was also made to the deletion certificate dated 15th October 1997 issued by the Cyprus High Commission, London, confirming that rig was removed from the Cyprus Register of Ships on 15th October 1997. It was also submitted that, as evident from the notice of delivery dated 6th October 1997 issued by Kennedy Marr Limited – Shipping & Offshore Specialists, a copy of which was placed at page of 7 of the paper book, the rig was ready for delivery on 6th October 1997. Learned counsel has also made references to the log maintained by the surveyor, i.e. London Offshore Consultants WLL, extracts from which were placed at pages 19 to 23 of the paper‐ book, which shows that the ship was moved out of Indian waters on 4th October 1997 and was delivered to the buyer on 6th October 1997 in international waters (at latitude 17°33.0’ N longitude 69°25.0E’). It is again and again emphasized that the assessee is a non resident and, therefore, none of its income cannot be taxed in India unless it is accrues or arises in India, and that income on sale of a rig outside Indian territory, by no stretch of logic, can be said to have accrued or arises in India. Learned counsel did not dispute the facts, save and except for the date of sale – which he claimed to be 6th October 1997, as against 19th September 1997 taken by the authorities below, but he did contend that these facts did not really justify taxation of gains on sale of rig in India. The dispute is thus confined to mainly to legal issues arising out of by and large undisputed facts. We are urged to hold that the gains on sale of rig have no tax implications in India.

16. On the other hand, learned Departmental Representative vehemently relies upon the orders of the authorities below and takes us through the same. It is emphasized that a series of steps have taken place, during the period when the assessee had a permanent establishment in India and when this asset was being used by the said permanent establishment, to effect the sale of rig – right from initial agreement, inspection, deposit of earnest money, drawing of bill of sale, obtaining clearance for movement of rig, termination of contract, and allowing access to the surveyors to monitor movement of rig to international waters. It cannot, therefore, be said that sale has not taken place during assessee’s having a permanent establishment in India and during the period when the rig was so used as an asset of the permanent establishment. Merely because one last step is completed outside Indian territory, i.e. handing over of the rig in international waters, it cannot be said that the sale of rig has taken place outside India. It is pointed out that the buyer has inspected and rig and satisfied himself about the same, and, accordingly, as part of terms and conditions of the agreement, deposited 25% of sale consideration. This exercise took place much before the end of the permanent establishment in India. We are urged to view the transaction in totality and give a reasonable interpretation to the steps taken by the assessee as also the agreement entered into by the assessee. In any case, according to the learned Departmental Representative, even if we come to the conclusion that the sale has indeed taken place on 6th October 1997, we must bear in mind that the sale has taken place as a part of winding up operations of the permanent establishment, and, therefore, even if the time of sale be shortly after the permanent establishment itself comes to an end, this sale is to be treated as part of winding up operations of the PE. We are thus urged to confirm the findings of the authorities below.

17. In rejoinder, learned counsel once again reiterated his arguments and submitted that we must bear in mind the basic fact that the assessee is a non resident and that the asset has been sold by the non resident outside Indian territorial waters, and, as such, it cannot have any tax implications in India. We can not, according to the learned counsel, construe the provisions of the Income Tax Act in such a manner that in case a person ever does business in India, the Indian tax exposure will continue to haunt him forever in respect of disposal of his assets used in his former operations in India.

18. We have heard the rival contentions at length on this aspect of the matter as well, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

19. Hon’ble Supreme Court has, in the case of CIT Vs Hyundai Heavy Industries Limited4, had an occasion to consider the scope of taxability of non residents, under the Indian Income Tax Act, in respect of profits of their permanent establishments in India. Their Lordships have, inter alia, made the following significant observations:

7. A short question which needs to be answered in the present case is what are the profits reasonably attributable to the assessee's PE in India. In order to answer the above question we are required to analyze the scheme of the (Income Tax) Act. Under Section 4 of the Act it is the total income of every "person" which is taxable. A foreign company which is not wholly controlled or managed in India is a non-resident so far as its residential status is concerned. Section 5(2) of the Act lays down that as far as a non-resident assessee is concerned scope of total income of such an assessee is confined to an income which accrues or arises in India or is deemed to accrue or arise in India and which income is received or deemed to be received by such foreign company. Therefore, it is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India. A non-resident assessee may have several incomes accruing or arising to it in India or outside India but so far as taxability under Section 5(2) is concerned, it is restricted to incomes which accrue or arise or is deemed to accrue or arise in India. The scope of this deeming fiction is mentioned in Section 9 of the Act. Therefore, as far as the income accruing or arising in India, an income which accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India. This business could be carried out through its branch(s) or through some other form of its presence in India such as office, project site, factory, sales outlet etc. (hereinafter called as "PE of foreign enterprise"). It is, therefore, important to note that under the Act, while the taxable subject is the foreign general enterprise (for short, "GE"), it is taxable only in respect of the income including business profits, which accrues or arises to that foreign GE in India. The Income-tax Act does not provide for taxation of PE of a foreign enterprise, except taxation on presumptive basis for certain types of income such as those mentioned under Section 44BB, 44BBA, 44BBB etc. Therefore, since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian PE of foreign enterprise are required to be computed under normal accounting principles and in terms of the general provisions of the Income-tax Act. Therefore, ascertainment of a foreign enterprise's taxable business profits in India involves an artificial division between profits earned in India and profits earned outside India.

(Emphasis by underlining supplied by us)

20. The scheme of taxability of a non resident in respect of his operations in India by way of “its branch(s) or through some other form of its presence in India such as office, project site, factory, sales outlet etc.” (referred to by Hon’ble Supreme Court as ‘PE of foreign enterprise’), in the light of the above observations of the Hon’ble Supreme Court, is like this. Its taxability in India in respect of profits of such PE is limited to only such profits as accrue or arise in India, or are deemed to accrue or arise in India. As regards the income accruing or arising in India, as observed by the Hon’ble Supreme Court, “an income which accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India” and “since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian PE of foreign enterprise are required to be computed under normal accounting principles and in terms of the general provisions of the Income‐tax Act”. Their Lordships have further observed that, “ This demarcation is necessary in order to earmark the tax jurisdiction over the operations of a company. Unless the PE is treated as a separate profit centre, it is not possible to ascertain the profits of the PE which, in turn, constitutes profits arising to the foreign GE in India”. It is important to bear in mind the fact, in all these discussions, Hon’ble Supreme Court has used the expression ‘permanent establishment’ very pragmatically in the context of the domestic law and referred to operations of a non resident through “its branch(s) or through some other form of its presence in India such as office, project site, factory, sales outlet etc.” as ‘’permanent establishment of foreign enterprise”, even though the expression ‘permanent establishment’ is generally used only in the context of tax treaties. The reference is also unambiguously for the application of domestic law. Ironically, while the Hon’ble Supreme Court has been proactive enough in recognizing, even in the context of domestic tax legislation, the concept of cross border permanent establishment which is prevalent in contemporary international trade and commerce, the legislature is yet to lay down any profit allocation rules for such PEs in the context of domestic legislation. As long as no such rules are legislated, the PE profit allocation, under the domestic tax legislation, has to be done , as Hon’ble Supreme Court has very aptly observed in Hyundai’s case5, “on the basis of normal accounting principles and general provisions of the Act”. Of course, once the PE profits are computed on such basis, the next step is to decide the head(s) of income under which such profits, wholly or in part, are taxable.

21. It follows, in our humble understanding, form the above observations that when we are examining taxability of a non resident in India, and such a non resident has operations in India through some other form of its presence in India, the non resident’s such presence in India is to be treated as permanent establishment in India, and such a permanent establishment is to be treated as a hypothetically independent of the non resident. The operations of the PE are then to be viewed on standalone basis, in the light of the aforesaid fictional or hypothetical independence, from the point of view of taxability in India. The PE is to be treated as a separate profit centre vis‐à‐vis the non resident, and the profits of such profit centre are to be computed “on the basis of normal accounting principles and general provisions of the Act” Therefore, while in reality there can not be any mutually exclusive division of assets between the non resident and its PE, the fiction of PE’s hypothetical independence requires recognition of the PE as independent of the non resident. Accordingly, the assets of the PE are also to be recognized as such. Viewed from this perspective, profit or gains on sale of assets of the PE are to be treated as profits of the PE – under whichever head of income these profits and gains may be taxed under the law. It will perhaps be absurd to suggest that this hypothesis of PE independence and PE being a separate profit centre is valid only for amounts taxable as ‘profits and gains from business or profession’ and not for amounts taxable under the other heads of income. When a PE ceases to exist, either there can be a transfer of asset back to the non resident or there can be an alienation of such an asset to an outsider. There can not any gains on transfer of assets back to the non resident, as no consideration is attached to such a transfer. However, when PE assets are being alienated to an outsider, the gains or losses on such alienations are to be treated as gains or losses to the PE with consequent tax implications. The gains or losses on sale of PE assets, in view of the above discussions, are to be treated as “accruing or arising in India” in the light of the above discussions and ratio of Hon’ble Supreme Court’s decision in Hyundai’s case6. It is wholly immaterial, in this case, whether the assets were sold in India or outside India, because there cannot be any challenge to the basic factual position that the rig was a PE asset and even if sales has taken place as a part of the winding up process of the Indian PE, the sale will still be taxable in India. Hon’ble Supreme Court has also referred to the deeming fiction of Section 9, i.e. income deemed to accrue or arise in India, for the purposes of taxability of non resident in India. Section 9(1)(i) provides that “all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India” are deemed to accrue or arise in India. There are, of course, certain riders to this provision inasmuch as (i) when all the operations of a business are not carried out in India, only such portion of income can treated as part of income as are reasonably attributable to operations carried out in India; (ii) when non residents operations are confined to buying goods from India for exports, income on sale of such goods are not taxable in India; (iii) when non resident is engaged in business of news  agency, publishing newspapers, magazines and journals, no income can be deemed to accrue or arise in India only because he is collecting news and views from India for transmission out of India; and (iv) when non resident is, subject to certain conditions, shooting a cinema film in India, no part of income is to be deemed to accrue or arise in India. Barring these situations, which are set out in Explanation to 1 and which are relevant for our purposes, all other incomes accruing or arising, directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India, are deemed to accrue or arise in India. As the learned CIT(A) very appropriately observes, the income on sale of rigs is deemed to accrue or arise in India for more reasons than one. It is an income from business connection in India because the asset sold was a part of the assets of Indian business operations of the assessee, and it, therefore, has a direct business connection in India. The gains on sale of rig is also deemed to accrue or arise in India because this rig was ‘an asset in India’ as also ‘ a source of income in India’. This rig was owned by the assessee and was used for the purposes of business of the assessee in India, as evident from the fact depreciation was claimed and, therefore, conditions of Section 32(1) were satisfied. The rig was a source of income in India, and there cannot be any dispute about this factual aspect either. The gains on sale of rig are, therefore, also covered by the fiction of income deemed to have accrued or arisen under Section 9(1)(i) in India. None of the exclusion clauses, that we have briefly touched upon earlier in our discussions, are applicable on the facts of the present case. In view of these discussions, in our considered view, the profits or gains on sale of assets of the Indian PE, or even the Indian PE itself, are taxable in India under the provisions of the Indian Income Tax Act.

22. As we uphold the taxability of income on sale of rig in India in terms of the provisions of the Indian Income Tax Act in principle, we are alive to the fact that the assessee has raised an objection to the effect that since sales has taken place outside India and the assessee is a non resident, it cannot be brought to tax in India, but we will deal with argument a little later. Before we do that, let us also take a quick look at the taxability in terms of the applicable tax treaty.

23. The assessee has been granted treaty benefits under the India Mauritius Double Taxation Avoidance Agreement7 (referred to as Indo Mauritius tax treaty also) even though it is a Cyprus based company and is registered in Mauritius only as a foreign company. In terms of Article 13 of the Indo Mauritius tax treaty, taxation rights in respect of the capital gains are allocated between India and Mauritius on the following basis :

1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the Contracting State in which such property is situated

2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a contracting State has in the other contracting state or of movable property pertaining to a fixed base available to a resident of a contract State in the other contracting state for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State.

3. Notwithstanding the provisions of paragraph 2 of this Article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of the Article shall be taxable only in that State.

5. For the purpose of this Article the term “alienation” means the sale, exchange, transfer or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States.”

24. The scheme of allocation of capital gains taxability rights is thus like this. While the gains on alienation of immoveable property are taxable in the tax jurisdiction in which immovable property is situated, gains on sale of ships and aircrafts, which are used in international traffic, as also moveable property relatable thereto, are taxed in which the effective place of management is situated. The common thread in this approach is that in whichever tax jurisdiction the income from the asset is taxed, gains on sale of such assets are also taxed in the same jurisdiction. The income from immoveable property under Article 6(1) is taxed in the tax jurisdiction in which immoveable property is situated. Article 13(1) as an extension of this provision seeks to tax on alienation of such assets also in the tax jurisdiction in which immovable property is situated. Likewise, under Article 8 (1), profits from operations of ships and aircraft are taxed in the tax jurisdiction in which effective management of the enterprise engaged in such operations of ships and aircrafts is situated, and Article 13(3) provides for taxability of gains on sale of such aircraft and ships, as are used in international traffic, in the tax jurisdiction in which effective place of management is situated. In the same manner, Article 13(2) provides that the gains on alienation of moveable assets of the PE (or the PE itself) or moveable assets used in fixed base for providing independent personal services ( or such fixed base) itself, are to be taxed in the country in which such PE or fixed base are located. Here also, the business profits form PE under Article 7(1), as also profits from the independent personal services rendered from a fixed bases under Article 16(1) are taxed in the tax jurisdiction in which such permanent establishment or fixed base is situated, and Article 13(2) serves as an extension of this provision seeks to tax gains on alienation of such assets also in the tax jurisdiction in which permanent establishment or fixed base is situated. In other words, therefore, the situs of taxability profits on alienation of assets is the same as the situs of taxability of income from such assets. The PE profits were taxable in India, and the PE profits were in respect of income generated by chartering of the rig. It is thus clear that the profits on sale of the rig are also taxable in India. This is the clear mandate of Article 13(2) as also the scheme of taxability of gains on alienation of assets pertaining to a PE in India.

25. It is also interesting to note that it was open to the assessee to opt for taxability of barge hire, on gross basis, and that precisely was the case of the Assessing Officer in original assessments for all these assessment years. In such a situation, perhaps Article 13(2) would have had no application. However, assessee disputed the taxability on gross basis and carried the matter in appeals before this Tribunal. It was a result of the directions of the Tribunal that the assessee was allowed depreciation on the rig, which was claimed to have written down value of Rs 51,21,12,236 as on 1st April 1993. It did suit the assessee at that point of time because, as against a tax liability on gross basis of receipts, the assessee was able to show losses in India operations. The assessee has thus claimed losses which are attributed mainly to the depreciation. Once the assessee himself opts that he is to be assessed on the basis of ‘permanent establishment’, and that claim is accepted by the coordinate benches, it cannot be open to the assessee now to turn around and avoid corollaries of that status.

26. Learned counsel has laid a lot of emphasis on the contention that at the point of time when sales took place, the PE did not exist. That proceeds on the assumption that the date which is relevant for sale is not the date on which the sale invoice is drawn up, not even the date on which possession of rig comes in the hands of an independent surveyor for ultimate handover to the buyer at a specified offshore location, but the only relevant date is the date on which the rig is handed over to the end buyer in international waters. The correctness of this assumption, apart, it is also important to bear in mind that so far as continuity of the permanent establishment is concerned, the continuity of business operations through the PE are at best relevant only for the purposes of taxability of business profits in the source country and for no other purposes. A PE may not continue to exist during the period when its winding up is in progress, but that does not obliterate the treaty provisions to the effect that gains on such alienation of PE or PE’s moveable assets will be taxed in the tax jurisdiction in which PE is situated. If we are to hold that even capital gains of alienation of PE or PE’s moveable assets can be taxed in the source country only when PE exists, the provision regarding taxability of gains on PE or PE assets in the source country will be rendered redundant , because at the point of time when PE is alienated or critical PE assets are alienated, PE cannot continue to exist. It will be merely for asking, in such a situation, to avoid the tax liability on such an alienation of assets by simply deferring the receipt of sale consideration or deferring the sale transaction itself. Such a situation is clearly an absurdity. While US Model Convention 2006 takes care of this problem by suggesting a specific sub clause in Article 7 to the effect that, “In applying this Article, paragraph 6 of Article 10  (Dividends), paragraph 4 of Article 11 (Interest), paragraph 3 of Article 12 (Royalties), paragraph 3 of Article 13 (Gains) and paragraph 2 of Article 21 (Other Income), any income or gain attributable to a permanent establishment during its existence is taxable in the Contracting State where such permanent establishment is situated even if the payments are deferred until such permanent establishment has ceased to exist” (emphasis supplied by us by underlining), even without this clause, which is no more than clarificatory in nature, the position remains the same. In the case of Van Oord Dredging & Marine Contractors BV Vs DDIT, a co ordinate bench of this Tribunal has held the even business profits of the assessee, which accrued to the PE, can be taxed when received in a later year in which PE ceased to exist. The deferral of receipt, therefore, is clearly tax neutral.

26. In view of the above discussions, in our considered view, the gains on sale of rig, which was a PE asset on which depreciation was claimed all along, is taxable in India – under the Income Tax Act, 1961 as also under Article 13(2) of the India Mauritius tax treaty.

27. A lot of emphasis is placed by the learned counsel on the contention that since sale of rig has taken place on 6th October 1997 and outside Indian territorial waters, it has no tax implications in India. As we have already noted earlier, the mere fact that the receipt of sale consideration, or even the sale transaction itself, is deferred, has no bearing in taxability of the transaction as long as the transaction otherwise leads to taxability in India. That apart, even on merits, it cannot be said that sales has taken place on 6th October, 1997. Learned counsel for the assessee has relied upon the surveyor’s report to the effect that the delivery was handed over to Pride Global Limited of British Virgin Islands on 6th October 1997. It is, however, important to bear in mind the fact that this surveyor came to picture to facilitate the transfer of rig to the buyer, and came to board the rig on 15th September 1997 and started the process of moving the ship to international waters and at the specific place where rig was to be handed over to the buyer. While assessee has filed the extracts from surveyor’s log, reflecting activities from 1st October 1997 to 6th October 1997, there was no compliance to our requisition of filing entire surveyor’s log in respect of activities on this ship i.e. from 15th September 1997 to 6th October 1997.

28. We have noticed that immediately upon sale invoice being drawn up i.e. 17th September 1997, the process of moving the rig to international waters had started. The process of moving rig to the international waters is thus a result of sale of the rig, and not, as claimed by the assessee, sale of rig is independent of moving it to the international waters. The movement of the rig and its handing over to the buyer is to be seen in conjunction with the fact of having sold the rig by way of invoice dated 17th September 1997. Learned counsel’s emphasis is that in any case delivery is given on 6th October 1997 and the sale is concluded on that date only. Even if that be so, the delivery is in regard to sale transaction which took place on 17th September 1997 and all these factors have to thus relate back to the date of sale invoice – i.e. the date on which sale has take place. There is no other sale invoice, except the invoice dated 17th September 1997, which is drawn up for this sale of rig. To suggest that it is only a performa invoice, as has been suggested by the learned counsel, is devoid of any legally sustainable basis, as neither he has produced any other invoice, which could be the actual invoice, nor brought on record any material to show that this invoice is not acted upon. On the contrary, we have noted that this sales invoice was duly notarized by one Nigel Peter Ready, a London based notary public, who inter alia certified that the said “bill of sale was signed and delivered as a deed in my presence by Claire Hamilton Horsley, the duly authorized attorney of Cartier Shipping Limited of Nicosia, Cyprus, under and by virtue of a power of attorney dated 12th September 1997…”. It cannot, therefore, be said that this invoice date has no relevance or that it could simply be brushed aside. The assessee has also filed copies of some bank advices in support of the contention that the balance consideration was made only on 6th October 1997, i.e. after the delivery of the rig was given, but neither these advices show the name of the assessee, nor, in any event, the date of payment has to be necessarily taken as date of sale. We had also asked the assessee to file a copy of the agreement terminating arrangements with Amer Ship Management Limited, Bombay, so as to ascertain the circumstances in which the contract was terminated and its linkage with the sale, but, despite our specific requisition to that effect, the assessee did not comply with the same. As the material before us clearly indicates, the termination of contract was a result of the sale of rig and to complete the process of sale of rig. It cannot therefore be said that the business came to an end, rig was moved to international waters and then it was an unconnected event that the rig was sold. On the contrary, the correct sequence of events appears to be like this – the rig was sold, since rig was sold, the contract had to be terminated, and, as a part of the seller’s obligations under the contract of sale, the rig was moved to international waters. As a matter of fact, assessee’s intimation about discontinuance of business9 is somewhat misleading inasmuch as it states that , “ …the assessee company, although would be doing business elsewhere in international waters, has discontinued its business operations in India and has moved out the aforesaid rig from Indian territorial waters to international waters”. The movement of rig to the international waters

Letter dated 5th October 1997 addressed to the Assessing Officer – at page 29 of the compilation of papers was not for the purposes of doing business, as this intimation suggests, but for the purposes of selling the rig itself – a fact which was clearly and unambiguously known to the assessee.

29. It is thus clear that the movement of rig to the international waters was clearly connected with and consequent to sale of the rig, and necessary for fulfilling part of seller’s obligations under the sale contract. The sale had taken place on 17th September 1997 and since not only that the asset was a source of income in India for the assessee, and that it had a business connection in India which lead to taxability of income on sale “deemed to accrue or arise in India” under section 9(1), the asset was also located in India at the material point of time. The date of delivery and the date of payment are relevant inasmuch as they complete the sale transaction but the date of sale, in our considered view, is to be taken as the date on which sale invoice was “signed and delivered as a deed”, as certified by London based Notary Public. The contention of the assessee that sales took place on 6th October 1997, i.e. after the permanent establishment came to an end, is thus rejected on merits. That finding is, of course, without prejudice to our understanding, based on the reasoning discussed earlier in this order, that even deferral of sale or receipt of sale consideration, on sale of PE or PE assets, does not influence the tax liability in connection with sale of PE or its assets.

For the reasons set out above, we are unable to uphold the assessee’s challenge either to reassessment proceedings or to the quantum additions confirmed by the CIT(A). As far as quantification of addition is concerned, no grievances were raised before us nor any arguments were addressed on that aspect of the matter. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.